Going for the Jugular

The Daily Reckoning PRESENTS: If and when the West decides that survival is on the line, there could be an overwhelming forceful response of awe-inspiring proportions – Outstanding Investment’s own Justice Litle has a few things to say about Iran, the West, and energy prices. Read on…

GOING FOR THE JUGULAR

“Going for the jugular” is an expression used in sports and business life, indicating a strongly aggressive move or an especially competitive strategy. In casual use of the phrase, we forget the graphic nature of what is being described. The external jugular vein carries deoxygenated blood from the brain back to the heart. If the jugular is cut, death from blood loss is likely to follow.

We forget too that “going for the jugular” can carry significant risk for the attacker – be it man, mountain lion or terrorist-sponsoring nation state.

In geopolitical terms, Iran is going for the jugular here and now.

With the Middle East pretty much a constant powder keg, it is easy to imagine this recent flare-up is just another example of business as usual gone unusually bad. It is not. Through the proxies of Hezbollah and Hamas, with Syria as its lapdog, Iran has deliberately chosen this moment to up the ante.

As Iran sees it, the U.S. military is exhausted and overextended; the American public’s taste for military adventure is at low ebb; the world community is more committed to Chamberlainesque pacifism than ever; and the mullah’s baby steps toward nuclear capability have not only gone unpunished, but they have actually been rewarded with hints of diplomatic concession.

Smugness aside, Iran (and Syria and Hezbollah and Hamas) is taking a very big gamble. In one sense, they are reimplementing Saddam Hussein’s old game plan on a more subtle scale, calculating that the West does not have the will or the way to prevent their goal: the arrival and recognition of a new dominant power and force to be reckoned with in the Middle East. Iran’s ambition is to become the uniting force behind Shia Islam (in competition with Sunni al-Qaida), a nuclear counterweight to Israel and a true power broker on the world stage.

This is a generalization, as it must be. The situation on the ground is complex, and all players have their own motivations. (Sheik Hassan Nasrallah of Hezbollah, for one, has waited many years for this moment in history to unfold and has spent the last few years preparing for it.) The bottom line is that the supposed good faith efforts to solve this crisis by way of diplomacy, the world’s concerned nations putting their heads together and all that, is a load of absolute nonsense. This is not a regional spat between the Hatfields and the McCoys, in which the two sides can just set a spell and work out their differences. The situation is far more dire, far more calculated, and far more serious than that.

In his piece “War on Iran Has Begun,” David Twersky writes: “Years from now, the kidnapping of Cpl. Gilad Shalit will be regarded like the assassination of Archduke Ferdinand.” Many believe, like Twersky, that full-scale war in the Middle East is now inevitable. Whether or not the kidnapping of an Israeli soldier triggers a chain of events as momentous as the assassination that kicked off World War I, it is clear we are experiencing a raging bull market in geopolitical tensions.

From an investing perspective, the knock-on effect of these events will be to remind Wall Street that not only are the reasons for $75 oil not going away, they are getting even stronger. Kevin Kerr and I have gone on record calling for triple-digit oil, as have other better-known prognosticators, like Jim Rogers. We’ve been beating that drum for some time now. Wall Street is still waking up to this.

There are no easy answers to the situation we are in and legitimate question as to what the hard answers should be. Military action against Iran would accelerate and worsen the very problems that now have us in their grip: sky-high energy prices, out of control spending and inflationary pressures – not to mention all the horrors of war, the question of how to measure success and whether success would even be possible. Yet choosing to sit back and do nothing is a recipe for nuclear proliferation and, ultimately, nuclear exchange. Not to mention an open invitation for further consolidation of a terror-exporting power base and future attacks on the West.

Of course, Iran knows all this. Iran knows how hard the answers are. That is why it is acting as it is; that is why it is acting now. Iran is going for the jugular. The country’s timing gives it a powerful hand, but there is huge risk in this strategy. Some observers, such as Victor Davis Hanson, believe that the mullahs are playing with a fire that could wind up consuming them. Hanson warns that if and when the West wakes up to the danger it faces, if and when the West decides that survival is on the line, there could be an overwhelming forceful response of awe-inspiring proportions – disproportionate force like we’ve never seen.

Regards,

Justice Litle
for The Daily Reckoning

P.S. And as a backdrop to the Middle East, there is still Venezuela. And

Nigeria. And increasingly, Russia. The prospects for alternative energy sources, not to mention long-term opportunities for well-run energy companies of all stripes, are just as compelling as ever.

In Outstanding Investments, that’s just the kind of companies that we’re looking for – and the one’s we’ve found you’ll be sure to want to add to your portfolio. To find out more about Outstanding Investments – and to learn about a situation that once the truth gets out, it will send shock waves through the global economy.

Editor’s Note: Justice Litle is an editor of Outstanding Investments, ranked number one by Hulbert’s Financial Digest for total return performance over the past five years. He has worked with soybean farmers, cattle ranchers, energy consultants, currency hedgers, scrap metal dealers and everything in between, including multiple hedge funds. Mr. Litle also acted as head trader for a private equity partnership, and made contributions to Trend Following: How Great Traders Make Millions in Up or Down Markets, a popular trading book by Mike Covel (FT/Prentice Hall).

Whatever the Chinese may lack in quality, they more than make up for in quantity. Working stiffs in the West may be better skilled, but like Custer’s men at the Little Big Horn, they are being overwhelmed by the numbers.

An estimated 130 million migrant workers are on the move in China, most of them young women looking for work – so says a new documentary, “China

Blue,” by Micha X. Peled, a sellout at the recent San Francisco Asian Film Festival.

Jasmine Lee leaves her rural home to come to Shaxi, Canton, to help her family, and finds employment at a factory assembling denim clothing for export to overseas companies. There she shares a room with 12 girls in an upper floor of the factory building, makes less than a dollar a day, and works overtime without compensation. Leaving the factory without permission or sleeping during work hours means a cut in pay, and meals are automatically deducted from her pay.

Poor Jasmine is not alone. Only a couple of years ago in Dongguan, we read, a typical company in the city offered workers “base pay of $60 a month, and an additional $40 a month in overtime and free room and board in adjacent dormitories, where the workers sleep six or eight to a room.” So, at any rate, reported the New York Times in 2004, businessman could rent factory space from the local government for just 10 cents a square foot per month – barely 5% to 10% of equivalent space in the United States or Europe at the time. But that is only where the savings began.

As farming became more and more mechanized in the middle kingdom, farm hands were freed from the drudgery of fieldwork and put on the road to the coastal cities. It is estimated that as many as 500 million former peasants are now expected to join the labor force in the next two decades.

Since then, things may have changed a bit – for the better or for the worse, depending, of course, on whether you are a worker or a businessman. The Christian Science Monitor tells us that rural incomes are now growing more, and so are inland cities. As a result, migration to coastal boomtowns is not as much of a lure as before. Still, the overall picture stays the same. China is a vast pool of cheap, eager labor.

In the rural areas, workers cost not much more than $900, or so, on average per year. Plus, a special classification allows companies to employ workers with little paperwork or social insurance obligation. The typical workingman makes hardly a dollar per hour in China, or just over $100 per month. That is only three percent of what people earn in the United States, and a quarter of what the average Mexican earns. Even highly skilled workers, such as information technology professionals, are very cheap by world standards, starting at around $5,000 per year.

And there’s plenty more where they came from. China’s Ministry of Labour and Social Security (MOLSS) claims there were 8.33 million urban unemployed at the end of June 2006 – and about another million unregistered or laid-off. It estimates that the economy will need to find new jobs for 45 million urban people and 45 million migrant workers over the next five years.

And, that does not include rural workers or new graduates. Chinese universities and technical schools, for instance, are said to be turning out as many as 350,000 new engineers each year. As to the quality, the statistics are silent, but the big numbers talk loudly enough. The National Development and Reform Commission points out that 25 million young people will be looking for 11 million available jobs this year. As children of baby boomers, born around 1980, seek their first jobs in 2006, China will face a situation described as the “country’s worst employment crisis ever.”

“I went to China recently, as a consultant to a French firm that wanted to buy another company there,” began a companion at dinner last night. “We went to tour the factory. It was very modern, clean and even air-conditioned, which was a blessing, because it was almost unbearably hot outside. But we went into one room that was not air-conditioned. And there was a whole team of young men welding parts together. With the extra heat of the welding machines, it didn’t look to me as though they could survive. But there they were working away.

“In my report, I mentioned this…saying something like ‘management should consider air-conditioning for all the work areas.’ But the Chinese snapped back that they ‘weren’t interested in any advice from Western consultants.’ They knew how to run their business. And the people in the un-cooled rooms were trainees, who ‘had to learn how to work.’

“Who can compete with these people?”

More news from The Rude Awakening…

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Chris Mayer, reporting from Gaithersburg, Maryland:

“Unlike the old bootleggers’ white lightning, produced from hidden stills under the pale glow of the moon, this shine is legal – and you don’t drink it. Your car does.”

What is Chris talking about? Find out in today’s Rude.

————–

Back to Bill Bonner, with more thoughts from France…

*** Surprise, surprise!

“Fed Stops Rate Increases, Ending 2-year Run as Economy Slows,” says Bloomberg. On the one hand, the Bernanke-led price-fixers could have raised rates to fight inflation. On the other hand, they could have cut rates to prevent deflation. Instead, as we predicted in this little space yesterday, they decided to sit on both hands. They must judge 5.24% the perfect fed funds rate for right now. For the first time in two years, the Fed couldn’t think of a better one.

From the inflation front comes news that business costs are increasing at nearly four times the increase in productivity. And U.S. gasoline prices of $3 per gallon are being prodded upward by news from both north and south. In Canada, rust in the pipeline has shut down oil inflows from Alaska. In Mexico, the Energy Ministry revealed that oil reserves from the nation’s major fields are falling much faster than expected. Last year, Mexico satisfied eight percent of the United States’ petroleum appetite.

Also prodding up the prices for consumers, of course, is housing. To get this into long-term perspective, the typical house cost $3,000 in 1905. Now, it costs around $220,000. Most of the increase, we note, has come in the last 10 years.

As Dean Baker writes:

“Ordinarily, house prices rise at roughly the same rate as other prices. Nationwide, house prices stayed virtually even with the overall rate of inflation from 1950 to 1995. However, in the last 10 years they rose by more than 50 percent, after adjusting for inflation. This created more than $5 trillion in housing bubble wealth.”

But booms beget busts and riches beget rags. And now, a housing inflation is turning into a housing deflation. We turn to Dean Baker again for a report from the front:

“Several reports released this week provide the strongest evidence yet that the housing bubble may finally be deflating. Sales of new and existing homes are both down more than 10 percent from their peaks last year. Mortgage applications are down 20 percent. Sale prices have barely risen from the level of last year, and are actually down after adjusting for inflation. Inventories of new and existing homes both stand at record levels, and the vacancy rate for ownership units has also hit a new high.”

And Chuck Jaffe at Marketwatch adds:

“The popularity of adjustable-rate mortgages means that nearly 25% of all outstanding U.S. mortgage debt is due for an interest-rate reset within the next two years, according to Economy.com, a Web site run by Moody’s Corporation. Some $400 billion in loans will get a new rate this year, and another $2 trillion are set to move in 2007.

“Those moves won’t be pretty. Just two years ago, the prime rate stood around 4%; today, it is more than twice that. As a result, payments on some ARMs will double too. The current forecasts from a number of experts have defaults on those loans increasing by 10%.”

*** Finally, a dear reader inquires about our writing etiquette:

“I’m and old codger, and pretty sure the lyrics are “it’s too darned hot,” and, “I’d like to spoon with my baby tonight.” In my day we kept our blasphemy private, and spooned rather than screwed.”

Our reply: On the London stage, where we saw the show…darned became ‘damned.’ As for spooning…it remained unchanged.

*** And another raises a question of grammar:

“Why do you always refer to yourself as we? Is this correct English? I am a hillbilly and a redneck, but it seems strange to me to refer to oneself as we.”

We reply: Customarily, a writer speaks of himself in the first-person singular, first-person plural (often referred to as the “royal we”), or third-person singular. We eschew the first-person singular in that it always sounds too egocentric, too immodest, and too personal. We write as “we” rather than “I” to make a distinction between our literary self…and our very own, personal self.

Speaking in person to your editor, you may address him merely as “you;” no honorific title or sycophantic gesture is necessary. There is no need to curtsy or bow, for example. He is a simple, unpretentious fellow who will respond to you, speaking of himself as “I.” But when he has a keyboard at his fingertips, he changes character. He is, of course, still unassuming and lovable, but he is not necessarily the same unassuming, lovable, good egg you would meet in the flesh, should you be so lucky. He permits himself a few literary flourishes…a few grands gestes d’auteur…a few exaggerations and ironies, often accompanied by a wink to alert dear readers…including, but not limited to, the “we.”